How Demographics Shape Development

The numbers are staggering: 73.8 million Baby Boomers, 72.7 million Echo Boomers and 63.2 million members of racial and ethnic minorities. Recognizing the vast revenue opportunities the statistics represent, real estate owners and developers increasingly are creating projects aimed at these three demographic groups.

Case in point: Pazo, a new clothing store that is a spinoff of Chico's, will soon be launched specifically to serve Echo Boomers. In the multifamily sector, the top-tier brand of Village Green Cos. is designed for Baby Boomers who want more spacious apartments. And the massive $260 million mixed-use International Gateways of the Americas project became a reality partly because of the growing Mexican population in San Diego.

The complexion of America is as varied as the country's terrain. For example, all Baby Boomers don't share the same cultural and socio-economic backgrounds. We are, in fact, a nation of niches, as respected industry veteran Leanne Lachman asserts in a recent report.

“The big developers grew by producing tracks in suburban America, but there is no longer a mass market in the U.S.,” says Lachman, a principal with Atlanta-based Lend Lease Real Estate Investments and a member of the Washington D.C.-based Urban Land Institute (ULI).

Her report, A Nation of Niches: Real Estate's Demand Demographics — co-authored by Deborah Brett — concludes that future real estate demand will be best supplied by local niche players who can accurately target what their communities want and need. “Standardized product just doesn't fit anymore like it did in the 1970s when the average household consisted of a mom, dad and two kids,” says Lachman.

The three-level Koreatown in Los Angeles is an example of the newer, customized product that is becoming more common in the U.S. The shopping center, which features the flagship store of the H.K. Market grocery chain, serves the city's growing Asian community.

In addition to keeping a close eye on the demographic groups, developers also are paying attention to income patterns. The $90 million, 750,000 sq. ft. Camp Creek Marketplace in Atlanta shows how developers can benefit if they do a little shoe-leather investigation in addition to studying basic demographic information. Shopping center developers had long neglected south Fulton County, Ga., because the 1990 U.S. Census data listed the average income at $55,270, a figure that didn't pique developers' interest, says Mark Toro, a partner with the Atlanta office of Cincinnati-based North American Properties.

But when he drove through the predominantly African-American neighborhoods in early 2001, Toro discovered several $300,000 and $400,000 homes. “We did our own in-depth housing study that showed the average price of homes in the area as $227,000,” he says. “If the average family makes $55,270, it can't afford a $227,000 home. This showed that the area has higher incomes than many white neighborhoods.”

More importantly, other than a few grocery-anchored shopping centers, an aging regional mall and home improvement stores in a 15-mile radius, there was an overall void in retail product, Toro says.

But the income data was compelling enough to attract three large anchors — Target, BJ's Wholesale Club and Lowe's Home Improvement Warehouse — to North American Properties' Camp Creek Marketplace. Other retailers rapidly followed, and today the power center is 90% pre-leased, with stores set to open in the second quarter of 2003.

Toro sees interest among retailers in Camp Creek as an indication of pent-up demand in an affluent area. “It's not a black or white thing, it's a green thing,” maintains Toro. “If there is income and density — and in this case there's also a lack of competition — then retailers will be attracted, and it's just a matter of finding the retailers that best serve that community.”

IMPACT OF MINORITIES

According to the 2000 U.S. Census, more than 11% of the population was born outside the U.S., up from 8% in 1990 and 6% in 1980. The Lend Lease report states that the last time the percentage of foreign-born population exceeded 10% was in 1930, when the total number of foreign residents was less than half what it is today.

Most immigrants still enter the U.S. through gateway cities such as Los Angeles, New York and Miami, although the Lend Lease report also notes the trend for more immigrants is to move directly to suburbs of the gateway cities and smaller towns in rural areas. According to the 2000 Census, about 44% of the immigrants who entered the country in the 1990s were between 20 and 34 years of age compared with 21% for the rest of the American population.

Hispanics have surpassed African-Americans as the largest minority in the U.S. Hispanics comprise 12.5% of the population, compared with 12.1% for African-Americans, according to the Census. In the 1990 Census, Hispanics made up just 9% of the population, while African-Americans made up 11.8%. In 2030, according to the Lend Lease report, Hispanics will jump to 19.4% of the population, and African-Americans will make up about 13% of the population.

Hispanic population growth and immigration helped maintain the population base of U.S. cities, which otherwise would have experienced population losses during the 1990s. According to the report, 71 of the 100 largest American cities lost non-Hispanic white residents during the 1990s, with Detroit losing more than 50% of its non-Hispanic white population. Baltimore and Milwaukee lost almost 30%.

Immigrants of varying ethnicities also are moving to the suburbs. According to the Lend Lease report, a majority of Asians now live in the suburbs, as well as half of all Hispanics and 39% of African-Americans. Anthony Downs, a senior fellow at Washington D.C.-based The Brookings Institution, says that an influx of immigrants who buy the houses being vacated by older Americans will encourage suburban growth. Downs also argues that residential developers will have to adapt housing plans to accommodate immigrant groups with larger households.

As a result of population changes, developers are looking to build more ethnically oriented projects, such as the $260 million mixed-use International Gateways of the Americas that connects San Diego with Tijuana, Mexico. Las Americas is being developed as a public/private partnership by the two cities in conjunction with LandGrant Development USA and its Mexico City branch, LandGrant de Mexico. LandGrant USA also formed a joint venture with McLean, Va.-based investment firm JER Partners.

The 1.4 million sq. ft. project, located on the San Diego side of the border, is considered niche because it is being built mainly for people who cross the border daily. The project will feature Mexican stores and restaurants designed to appeal to Mexicans on the Tijuana side and American Mexicans living in California.

A key element of the project is a proposed pedestrian bridge, which LandGrant estimates will be used by eight to 10 million people annually. The project features 370,000 sq. ft. of retail space — including the Gap, Banana Republic and Nike, all of which opened last November — much of which will target the Hispanic consumer. The next two phases will include a cultural center, a hotel/conference center and an office tower, along with 470,000 sq. ft. of additional retail space.

Samuel Marasco, president of LandGrant, describes the Las Americas retailers as businesses that recognize the powerful advantages of tapping into niche markets. “The Asian, African-American and Hispanic populations present major businesses opportunities that are first driven by retail,” he says. “That stimulates revitalization and can be followed by vertical (high-rise) residential and some office space.”

Las Americas also is an example of the growing political power of ethnicities. Marasco explains that certain areas in San Diego have height restrictions of 30 ft., but the developers of Las Americas wanted to build higher, a decision that was left to the voters. “Over 68% of people voted in favor of eliminating the height restriction for Las Americas,” says Marasco. “We would not have been successful if not for the changing demographics of the area.”

To Marasco, Las Americas is a model for other areas, especially along the international line that runs from California to Texas. “Infrastructure, federal facilities, academic institutions, housing and retail all need to be developed there,” he says.

Marasco also sees opportunities for projects in areas that haven't been perceived as valuable locations, like inner cities. “Places that were looked at as poverty pockets now have thriving communities and a strong middle class that make them ripe for retailers,” he maintains.

The growing diversification of the U.S. population also is reflected in chain stores, which formerly took a cookie-cutter approach. Companies are stocking stores with products geared toward specific groups.

Tom Spencer, vice president of San Diego-based Claritas, a marketing information firm that breaks down data from the Census into more specific categories, says individual companies customize their products to the target audience.

“The same chain stores, like the Gap, will have a number of different merchandising plans for different locations,” says Spencer. “They won't sell the same pants, or the same colors, at every store.” Spencer says this trend is especially evident with food. “Hispanics like certain food and beverage items, like [Coca-Cola's flavored drink] Fanta, more than other groups,” he says.

BABY BOOM DEMAND CURVE

Despite the growth of immigration and different ethnicities, industry experts say that most investment and development is targeted at two groups: The Baby Boomers and Echo Boomers. At 73.8 million strong and growing, Baby Boomers — born between 1946 and 1964 — make up the largest segment of the American population, which is slightly larger than the Echo Boom generation at 72.7 million.

Baby Boomers are predominantly homeowners, and, according to the Lend Lease report, tend to stay in their homes rather than move to multifamily properties. Nonetheless, even if only a small percentage of people sell their large primary residences, it represents a significant number to the multifamily housing industry because the generation is so huge.

Mark Obrinsky, chief economist for the Washington D.C.-based National Multi Housing Council, adds that some empty nesters have decided to leave behind the hassles of suburban living for less harried work commutes. These people tend to rent or buy luxury apartments in downtown cities.

Lend Lease, responding to the demand for luxury housing in Philadelphia, recently partnered with locally based development firm P&A Associates and Clark Realty Capital of Bethesda, Md., to develop a 46-story apartment tower in the CBD called St. James. It is the first new apartment building constructed in the area in more than a decade.

Jonathan Holtzman, CEO of Farmington, Hills, Mich.-based Village Green Cos., says his firm has established four different apartment brands to appeal to different demographics, including a pair of property types aimed at Baby Boomers. Regents Park, the company's top-tier apartment community, is designed for Baby Boomers, including empty nesters vacating their single-family homes who want upscale, spacious apartments and amenities such as a concierge and underground parking. “These communities have libraries, billiard rooms, grandkids' playrooms and movie theaters,” says Holtzman.

Then there is the company's namesake brand: Village Green, which appeals to “renters by choice,” including Baby Boomers in their 30s and 40s. These apartments feature attached garages, dens for home office use and upgraded furnishings.

Dick Herrman, vice president of marketing for Washington D.C.-based REIT AvalonBay Communities, says his firm does not specifically market entire projects toward one demographic. “Right now, we make sure that our units have a lot of flexibility,” he says. Herrman says some apartments will have larger spaces for the empty nesters who want to keep their furniture, while others will be studios for Echo Boomers.

Still, AvalonBay is addressing the growing demand for apartment units in downtown areas. The company is building more projects in urban infill areas, such as Avalon at Gallery Place in Washington D.C., and Avalon Riverview in Long Island City, N.Y. “Both Baby Boomers and Echo Boomers want upscale apartments that are right where the action is, and where they will be closer to work and to transportation,” says Herrman.

HEARING THE ECHO

Although Echo Boomers — ages 6 to 23 — are nearly as large in number as Baby Boomers, the group is more ethnically diverse. And since they are younger, the real estate industry is developing different kinds of products to attract them. Village Green developed Village Park for the Echo Boomers, also known as Generation Y.

“Many of these clients are first-time renters in their teens or early 20s,” says Holtzman, adding that his firm tries to capture a resort-like atmosphere at Village Park units. “These apartments are more activity-oriented, with swimming pools, clubhouses that play music and outdoor fireplaces and Jacuzzis.” Village Park apartments tend to be renovated apartment buildings, which helps keep the cost down for this less-affluent group.

Mike Acton, director of research for Boston-based investment advisor firm AEW Capital, notes that Echo Boomers, many of whom are starting to graduate from college, tend to rent apartments. “They're not buying houses because they haven't had the time to accumulate enough wealth,” he explains. “Plus, they don't know where they'll be in two or four years, and they don't want to make a 30-year commitment on a house.”

The Echo Boom generation has very different needs compared with other demographics. Unlike the more affluent Baby Boomers who rent or buy luxury apartments or different ethnicities with large families, Echo Boomers are looking to live where the action is. “The kids coming out of college are renting and prefer to be in central city downtowns or suburban downtowns,” says John McIlwain, senior fellow for housing at ULI.

And some developers are taking note. Larry Bond, chairman of Bond Capital Ltd., is building a $125 million retail and apartment complex at Sunset Boulevard and Vince Street in Hollywood with partners Canyon-Johnson Urban Fund LLC and the State of California Teachers' Retirement System.

According to Bond, it is the largest multifamily residential development in the area. “We designed the physical units of the building to attract the Echo Boomer generation,” says Bond, citing the higher-than-normal ceilings at 10 ft. and the large 7-by-7 ft. windows. “The apartments will have a light, airy feel because Echo Boomers want the SoHo loft experience.”

Bond notes that the desired look is cutting edge — apartments will feature a mix of unusual materials such as Forbo's vinyl and linoleum for countertops and stained fireboard for cabinets. The complex, scheduled to open in 2004, also will offer a billiard room, business center and outdoor fireplace.

The ground-floor retail also specifically targets the Echo Boom generation. Borders and Bed, Bath, & Beyond are the anchor tenants, along with a mix of coffeehouses and low-cost dining options, such as Baja Fresh.

Bond expects to build similar models in other cities in California, as well as Chicago and possibly New York. “We're developing cool places to live in the urban centers of our cities,” says Bond.

Echo Boomers most likely won't affect single-family housing demand for a few years, as each generation delays its move to the suburbs. The next generation of suburban home buyers is Generation X — now in their late 20s and early 30s — but who represent a comparatively small part of the population, according to Jacques Gordon, international director of research at Chicago-based LaSalle Investment Management. “Looking out five or 10 years from now, this means less peripheral development,” he says.

Echo Boomers are known for their love of shopping, and their tastes tend to drive retail in many areas. “We're seeing a transition of more retail being marketed to the teen-age population,” says Lachman. “They tend to buy more often and more things, even if the items aren't as expensive as what the Baby Boomers are buying.”

Some retailers that target older generations are developing new brands to attract Echo Boomers. Chico's clothing store, which has successfully built a brand for the 35- to 45-year-old female market, is building a new brand to go after the younger demographic, notes Michael McCarty, senior vice president of research and corporate communications for Indianapolis-based REIT Simon Property Group, a landlord for many Chico's stores. The new brand, Pazo, soon will launch six stores nationally.

“It's the law of large numbers,” says McCarty, explaining that if retailers want to continue to grow, they must expand into other demographics.

With so many niches, developers must find a way to build a project specific enough to target the needs of local consumers while not alienating others. Craig Schmidt, vice president of equity research for New York-based Merrill Lynch, admits it is a challenge. “Right now, most mall operators are still straddling the fence, trying to keep everyone happy,” he says.

The real estate industry can't afford to turn a blind eye to changing demographics, says Lachman. “Developers need to pay attention to shifting demographic trends,” she insists. “If not, they will see a serious erosion of their market.”